Afford Anything - Ask Paula: Should I Fire My Financial Advisor During a Pandemic?

Episode Date: June 8, 2020

#260: Katelyn wants to fire her financial advisor and move her investments from mutual funds into Vanguard index funds. Should she do this during the pandemic? Or should she wait? Marisa asks: can you invest in a Roth IRA if your income is inconsistent and might exceed the cap? Anonymous Moving-for-a-New-Job had a Simple IRA at her old job that she can no longer contribute to. She also can’t contribute to a 401k until she’s been at her new job for a year. Where should she put her money in the meantime? Anonymous “Olivia” is interested in a Roth conversion ladder, but wants to know: does the pro-rata rule apply here as it does with a backdoor Roth conversion? Mary received an $80,000 grant of RSUs from her employer when she started. These RSUs began to vest after one year, and the price per share has increased 44 percent. What should she do with the shares? My friend and former financial planner Joe Saul-Sehy and I tackle these questions in today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode260 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Before we start today's episode, a quick reminder to use your dollars as your voice. Donate your money and your time to worthy causes and worthy organizations. We have assembled a list of resources of both nonprofit organizations and GoFundMe campaigns that we support. You can find that at Afford Anything.com slash PSA Thursday. And if there is a nonprofit or a GoFundMe campaign that you would like to add to that list, please do so in the comments. We welcome and encourage that. I am also matching donations up to $3,000 that are made to the Committee to Protect. journalists, which is a 501c3 nonprofit that is protecting journalists who are being targeted and harmed while they're doing their jobs, the Atlanta Community Food Bank, and the Children's Development Academy of Atlanta, which works with economically disadvantaged preschoolers. I will match your donations to those three organizations. For all the details, please listen to our most recent PSA Thursday episode or visit Afford Anything.com slash PSA Thursday. Thank you for listening. Thank you for taking action. And with that said, here's today's episode. You can afford anything, but not everything. Every choice that you make is a trade-off against something else, and that applies not just to your money, but also your time, your focus, your energy, your attention, anything in your life that's a scarce or limited resource.

That leads to two questions. Number one, what matters most to you? And number two, how do you align your daily decisions in a way that reflects that? Answering these two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pan. I'm the host of the Afford Anything podcast. Every other episode, I answer questions that come from you, the community.

And today, my buddy Joe Saul-Sehi is with me to answer these questions. What's up, Joe? Believe it or not, Paula, I'm sitting at home. You're kidding. Yeah, and you'll find this weird. I've watched a lot of television lately, a lot. Wow. And you'll find this even weirder.

I need a haircut. That is so unusual. I know. And for people who see me before, the fact that I need a haircut is crazy because I only have about seven hairs total. But yes, they need to be cut bad. I saw this meme online where somebody said, wow, I had no idea so many Americans were living haircut to haircut. That has been me. I didn't know it. Yeah, we talk a lot about insurance and protecting your downside and, man, protect the haircut. You know, having long hair actually, it gives you this margin of error.

You can go for months without a haircut and nobody really notices. Well, people can't see me again. So I don't grow hair on the front of my head at all. But in the back, even though that grows slowly, that's growing more quickly. I am about to have an inadvertent mullet. It looks like business in the front and party in the back and on the sides if I don't get something done quick. Well, clearly, if you can't live it down, play it up. Clearly, you got to dye that hot pink.

I got to. Maybe I do that instead. That'll mix it up. Well, speaking of mixing it up, how's that for a segue? Hey, yo. Our first question today comes from Marissa. Hi, Paula. My name is Marissa.

I really love your show. Something I've been wondering about, though, is investing in a Roth account. Can you do it if your income is inconsistent and if it perhaps might go over the cap for Roth investing. How do you handle this if you're self-employed? Thank you. Marissa, that is a fantastic question. Now, first of all, before I answer it, I want to give some background for the sake of anyone listening who's wondering, what on earth are we talking about? In order to contribute to a Roth IRA, your income needs to fall under a certain limit. In the year 2020, your modified adjusted gross income, if you are married filing jointly, needs to be less,

less than $196,000 to make a full Roth IRA contribution. There's a phase-out window if you make between $196,000 and $206,000. And if you make more than $206,000, then you are ineligible to make a direct Roth IRA contribution. That's if you're married filing jointly. If you're single, you need to make less than $124,000 to make the full contribution. There's a phase out between $124 and 139, and then you're ineligible if you are single and you make more than $139,000. Now, the workaround to this is that if you are not eligible to make a Roth IRA contribution, if your income is too high, you can make what's referred to as a backdoor Roth conversion. And so what you do in that case is you make a contribution, a non-deductible contribution to your traditional IRA, and then you convert that money from your traditional IRA to your Roth IRA. The way that I have done this, it's quite straightforward.

I will simply put the full contribution into my traditional IRA, wait for 24 hours, and then in my case, I call my brokerage, which is totally unnecessary because most brokerages will allow you to do this online. You then just roll that money from the TRAD IRA to the Roth IRA, and boom, you've made a backdoor Roth IRA contribution. So Marissa, here is what I would recommend. And there's no harm in executing a backdoor Roth conversion, even if it's not required. So even if it turns out that you didn't have to make a backdoor Roth contribution, like if it turns out that you could have made a direct Roth contribution, no big deal. If you made a backdoor Roth, there's no harm in doing it. So when in doubt, if you're not quite sure what to do, make a backdoor Roth contribution.

It's not going to hurt you either way. So that's my number one tip. Now, number two, and this is an alternate strategy, and this is stated for the sake of anybody who made a direct Roth contribution and then at the end of the year, they get some unexpected money, maybe a big commission or a big bonus, and it sent them over the edge. If that is your case and you have made a direct Roth contribution and it turns out now that you are above the income limit, don't worry, because you're going to be a direct Roth contribution,

don't worry because you can fill out what's called a removal of excess form. And by filling out a removal of excess form and submitting that to your brokerage, you can remove that money from your Roth IRA. And then, once that money is removed, you can do a backdoor Roth conversion. You know, something else I was thinking, too, that Marissa did not bring up, but I know that there are lots of other people, Paula, with inconsistent income. An inconsistent income creates a lot of problems for people when it comes to their overall planning. Like, how do I save it all when I have inconsistent income? I know a lot of people

that get big, either commissions from the place that they work, or maybe they are on a commission salesperson basis, or they're somebody that's self-employed. So they get a big check. They try to make the Roth IRA contribution then. And to her point, what if I don't end up making enough, right? So you explain that well. But it also brings up this saving thing. And self-employed people would always come to me when I was a financial planner and they'd say, I love this idea of dollar cost averaging. I just don't think I can do it. Like, how do I put money in every paycheck when I don't get a consistent paycheck? And so I came up with a strategy that has always worked really well for me and also worked

really well for my clients and friends. And this is it. Figure out an amount that you can pay yourself that is less than what you think you're going to make this year. So the first thing we have to do in our head, and by the way, this is for anybody. We have to first divorce the concept of what I make is what I spend, which we should be doing anyway, right? But we don't do that. We get a raise at work and then we think big screen TV.

We need to separate these two things. Just because I make X doesn't mean I need to spend that. So come up with an amount that you're fairly certain you're going to earn and then have your money go into a separate account that's not. the account where you're going to spend money. Have that be an account that's going to fluctuate, go up and down and up and down. But every two weeks or once a month or whatever your budget is, pay yourself out of that account that swings up and down based on your cash flow. Have a set amount leave that account and go into your spending account so that now you

are paying yourself a set salary all the time. and that gets rid of the ramen noodle, ramen noodle, bam, I got a big paycheck. Let's go celebrate and blow a ton of money, a problem that a lot of people have. And it also allows you to save a portion of that money, every paycheck into whether it's a separate simple or into a brokerage account, whatever it might be, you can save the same amount then. It really, really helps not being on that boom-bust cycle by setting up a two-account system. all your money goes into account A and then pay yourself a set amount into account B and it makes life for, man, it made my life so much better. Well, and I think at a broader, bigger picture level, part of what I'm hearing you say is separate what your business makes from what you yourself make, like have separate identities for your business and yourself.

So by paying yourself a fixed salary, a fixed weekly or biweekly or monthly salary, you are essentially saying I as an individual earn a salary from my business and what the two entities make are not the same. And even if you're a commissioned salesperson working for someone else, I still like that. What I'm bringing in via commission is not what I'm really earning myself. So treat that commission as if you are self. employed. Because frankly, even though you're selling somebody else's stuff, you really are self-employed. You're only getting to spend what you make. So in the case of a commission salesperson, for example, so they would have a base salary and then they would have those commission payments, would you suggest diverting specifically the commission payments to a separate

account and then finding the trailing 12-month average and then going a little under that and then paying themselves a portion of it? I would have it all go into that account, have everything still go into that one account. Ah, including the base salary. Including the base salary. Yeah, have that all go in and then pro-rate that commission and base salary X amount. It gets too messy having your money come from two different places. If I get to spend my whole paycheck that's the base salary and I spend a little bit more based

on the commission, forget that whole thing. Just have it go into X account, everything, and then decide how much money I'm going to pay myself every two weeks. And then this is cool. A couple times a year. and I've set specific dates at the six-month mark and at the 12-month mark, I now will tell Cheryl, I'll say, guess what? I'm giving myself a bonus this year.

And so we get a nice extra. But then at that point, because we have these weekly money meetings, we then decide what do we want to do with that that's more constructive than just blowing it? Because I found before that, and I really want to emphasize this, and people that are commissioned, straight commission salespeople, know this feeling. Sometimes those commissions are so few and far between that when you get that big check, you want to reward yourself by buying something that is stupid that you really don't need, but you feel like you deserve because you've waited for so long for this money to come in.

So I'm going to completely overspend now and it becomes a train wreck. At least it was for me and was for many of my clients before we created this system. What would you advise to anyone who has a small business but makes so little that that margin between what their business brings in and what they themselves need to pay themselves and to live on? If the difference between the two is super small, could they still set up this system? I mean, wouldn't they have to adjust to their own pay in times when their business isn't doing well? Now, you have to set this up at a time of plenty when you have extra money sitting there so that you can begin funding yourself through the lean time. So you can't start this during the lean time. You have to wait for that big check instead of spending it all right now, begin your proration.

But if there's a thin margin between what your business brings in and what you spend, you need to start thinking of yourself as a venture capitalist who might put money in your business. is this a business that's really well run? Is this a business that I would invest in? I start thinking about myself as a potential shareholder. And if you're spending every dime that you make on your business, there clearly is a bigger issue. And we need to talk about somehow separating the two of those numbers. All right.

So we have gone far beyond the scope of Marissa's question. But I like this discussion because it's fundamentally a discussion, not just about budgeting, but at a bigger level, how to think about the money that you're bringing in, regardless of whether you're self-employed, you're a small business owner, you have a side hustle, you have the type of employment

in which you have commissions. I think this conversation applies to a lot of people. But Marissa, to answer your question, when in doubt, just make a backdoor Roth conversion anyway. There's no harm in it. And to anybody else who at the end of the year realizes that, oops, I accidentally made a direct Roth contribution

and I wasn't eligible to do so, fill out a removal of excess form and then make a backdoor Roth. So thank you, Marissa, for asking that question. Our next question comes from Caitlin. Hi, Paula. My name is Caitlin. I'm 25 and I've been listening and loving the Afford Anything podcast for a few months now. I currently have a financial advisor and I know my investments with him are in mutual funds. I have been wanting to open my own Vanguard account and transfer the money into index funds. Would it be wise to find a my financial advisor right now during this pandemic and transfer my money to index funds, or do I need to wait? I know the key is to buy low and sell high. I'm also aware that I could

potentially be selling low and buying low right now, and if I wait, I could be selling high and buying high in the future, depending on what the market does. Which would be the better option? Thank you. Caitlin, that is a fantastic question. So what I hear inside of what you've asked are two topics. One is about firing your financial advisor and the other is about selling out of the investments that you have. I'm assuming that your financial advisor has assets under management. Now, in terms of those assets under management, as you said in your question, as long as you sell out of those investments and then use it immediately to buy like, investments, then it's same, same. It's essentially as if nothing has happened. I would not worry

about timing, assuming that you are selling out of your investments and then immediately buying other like-kind investments and the portfolio as a whole stays similar to where it already is. Yeah, as long as it goes quickly, right, Paula? I mean, just don't get halfway done and think, well, maybe there's something big coming up in the market and I got to wait. Don't wait. Yeah, get it done right now and you'll avoid blowing up your plan. Yeah, exactly. As long as the transfer happens immediately, you sell and then you buy, then we're all good. With regard to your financial advisor, I think anyone that advises me, and I've always been

very transparent about the fact that I pay for great advice, I want to surround myself with smart people. I want to be the dumbest person in the room. and I found that as I've done that more and more, my career has accelerated more and more quickly. So I'm very happy with that. But if you have no idea what your advisor is doing for you, you need to fire them. You have to fire them because, number one, comparing your investments with an advisor to a Vanguard account is not at all in Apples-Tapples comparison. We're talking about an advisor is not a mutual fund, an advisor is not a mutual fund picker.

An advisor is somebody that can dovetail all of the pieces of your life together and show you where your blind spots are and help you avoid stepping in problems that might occur. So what's cool about a great advisor is that many times, and studies, frankly, studies by Vanguard have shown this, a great advisor will help you do nothing often with your investments more often because investing is the one place where if you leave it alone and you don't touch it, you're probably doing a lot. better job than if you do touch it. Great advisors make their money most often by being great at telling you to stop overthinking it and stick with the plan. Now, when it comes to everything else, though, for me, that's where advisors being in motion make their money, making sure that I have the right risk management strategy, that my budget is tight, that I'm saving money into the right types of accounts, that I have a tax strategy, that I'm not just saving into a Roth IRA blindly, but I know why I'm saving it there. And also, you know, with the Stephen Covey stuff,

I'd like to quote all the time that I'm putting money in, but how do I take it out, right? You pick up one end of the stick, you pick up the other end. How am I going to remove this money? How do these tax law changes affect me? Where are there opportunities that I don't see any? And then also, something I like, I like advisors pushing my game, telling me, you know what? You're not making as much X areas I could be earning. What's my problem there? People that look at my life overall and point out my weaknesses. That's what a good advisor does for me.

And if you don't have that, you need to find it. I think you need those people in your life. And it doesn't have to be a CFP. I just like having smart people in my corner. So, yes, I would can your advisor because you think it's a mutual fund picker. Get rid of them. Unfortunately, a lot of people in the world of financial planning position themselves as people who primarily will manage your investments for you rather than people who will help you look at the big picture and spot your weaknesses and call out your unknown unknowns. And I think the latter is far more valuable.

I don't know any value in a mutual fund picker. There's so many cool, easy ways to. to find that online. And whether you're boring and into this whole efficient market nonsense like Paula is, or if you think the markets are a little more inefficient sometimes like I do,

it doesn't matter. I mean, there's so much, it is no longer, Paula. The world is no longer about getting information. Like back, even in the early 90s when I started, the world was still in kind of of how can I bring information

that I have that you can't get? And there was some information that, you know, Wall Street had at that time that other people couldn't get easily. But now with technology, information's not the problem. It's how do I wade through all of the junk and find the information that's specific to me? And that's where the individual relationship and dovetailing comes in. Like I need somebody to go, Joe, quit reading that. That has nothing to do with you. Here's what you need to be focused on.

Read this thing. this is really more something that affects you and where you're trying to go. So anybody that tells you that they have information that you need, I think is you're going the wrong way by following them. Right. It's less information and more curation and wisdom. Yeah. Yeah. Awesome. Well, thank you, Caitlin, for asking that question. We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business.

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This caller is moving from California to Florida, so what should we call her? I think we should call her Flo because she's moving to Florida. All right, Ben. Our next question comes from Flow. Hi, Paula. I really love your podcast, and I have a question for you because I am moving across country from California to Florida, and I'm starting a new job. This new job is super exciting. I will be earning almost twice as much as I was in California, and Florida has no taxes.

But my question is, I have a simple IRA for my last job. Because I was only at my last job for a very little time, there isn't a lot of money in it under $2,000. And I was told I can't keep investing the simple IRA because it's only for small businesses. My new job, while it has a great salary, won't let me start investing in the 401k plan until I'm working for a year at this job. What should I be doing in the year where I can't invest in the 401k and I can't touch my IRA either? Should I open another type of savings account? I also currently have about $30,000 in savings, and it is sitting in a savings account in my bank. I use it as an emergency fund. Occasionally I do dip in, such as for relocation costs, but I always put it back to 30,000.

I am not planning on retiring early because I love to work, but I definitely want to be financially independent. I am 39, and I don't plan on retiring until 70, but you never know where life takes you, So I definitely want as many assets as possible available and plan for retirement post age 65 or 70. I appreciate any advice on what to do. Thank you. Flow, first of all, congratulations on this new job. That's super exciting. As you said, you're doubling your salary and you're going to live in an area where there is a lower cost of living and no state income tax.

So your money is going to go a lot further. So huge congratulations to you for that score. I also love the approach that you have. You said that you don't want to retire early, but you do want financial independence. And I love that attitude because financial independence is not about early retirement. Early retirement is one of many possibilities that are open to a person who is FI. But financial independence ultimately is about having choices. It's about having flexibility. So reaching financial independence and then choosing to continue to work, that's the ultimate. And what's wonderful about that is that if something happens in your life in which you can't work, if you get sick or if somebody who you love gets sick and you need to take some time off, you have the flexibility to be able to deal with that. So that's the wonderful thing about FI. It's not about retiring. It's about having margin of error. It's about having wiggle room. It's about having greater choice. So to your question with regard to how do you

save before you have access to your employers 401K. First of all, of course, there is a traditional IRA or a Roth IRA. You can contribute up to a maximum of $6,000 to a traditional IRA, to a Roth IRA, or to a combination of the two of them, so long as the total contributions to a traditional IRA and or a Roth IRA don't exceed a maximum of $6,000. And that's because of your age. For those of you who are listening to this who are age 50 or older, you can contribute up to $7,000. So that is the first thing that I would recommend in terms of getting money into a tax-advantaged retirement account. If you have a high deductible health plan that is HSA eligible, health savings account eligible, you can also contribute up to $3,550 to your HSA that is also

a tax-advantaged contribution. And if you want to use that as a supplemental de facto retirement account, then what you could do is instead of using your HSA funds to pay for health expenses, you could pay for your own health expenses out of pocket. Save the receipt, just upload it to a Dropbox file or a Google Drive file so that you have that receipt to back you up in case you ever want to reimburse yourself from your HSA for that. but then pay out of pocket for your health costs so that that way the money sits in your tax advantage to HSA account and all of the growth that comes from that will be tax deferred. And to the extent that some portion of it will be eligible for reimbursement for any qualified medical expenses that you've paid for out of pocket, that portion will be tax exempt. So essentially by using your HSA as a de facto supplemental retirement account,

account, you take advantage of tax-advantaged growth for the duration in which your money is in that account. Now, that's assuming that the money in your HSA is invested rather than sitting in cash. Yeah, and definitely don't touch any of that money that you have as an emergency fund. I love that money sitting there. I think it makes so much sense to leave that money there. And the fact that you have that now, especially in a time of transition, the job sounds great. It sounds awesome. but if you get there and it's not as awesome as you think it is, you're going to be so happy that you

didn't lock that money in. So I would leave that alone. You know, I look at things, Paula, on a continuum basis. I always draw in my head kind of a stick figure of me today and then a stick figure of me at age 70. And she has over 30 years between those two numbers. And so my head immediately goes to there isn't going to be a 30-year period where there's nothing else going on, right? What are some of the more intermediate goals that she may have for money? Which means to me, if she has already been funding the heck out of retirement strategies where she has money locked up and she has her emergency fund, I may use this year to build my flexible money that you and I have talked about in the past. So open up a brokerage account and save into an index fund or two in that

account and give yourself some money that's longish term money, depending on what your goals may be, but that you don't have to worry about tax loopholes to try to get the money out later. So many people would end up coming into my office and asking all my monies in tax advantage accounts, Joe, how do I get it out? Well, the answer is, don't have all your money in tax. advantage accounts. But you can't solve that at 70, but before age 40, you have an opportunity here to begin planting some of those seeds. So I might suggest that, build that part of the garden. So in other words, use this as an opportunity to save for and invest for goals that might be 10 years out or 15 years out, things that she wants to do at the age of 50 or 55.

Yeah, and even if nothing comes along for that money, how great will it be when she gets to 70 when she retires and she'll have money that is in a pre-tax position, money that's in a tax-free position in the Roth accounts? But then she also has this money that she can just go to that's incredibly flexible. It's always great to have some money that you can go to that's not your emergency fund. but I don't have to worry about what the tax ramifications are of taking this money out beyond what's the capital gains tax. And the only way, Paul, around the capital gains tax is die and never spend the money or spend it or not. I mean, it's eat or don't eat, right? I mean, capital gains tax is what it is. So spend it. Well, there's actually one other way around it. And that is, and I don't know what your goals are, but if you have goals of

the amount of money that you want to give to charity, if you have philanthropic goals, this year, this next year, when you can't contribute to your workplace 401k, might be an ideal time to pile money into a taxable brokerage account, which then you can move into a donor-advised fund. And when you move that money from a taxable brokerage account into a donor-advised fund, you won't have to pay taxes on the capital gains that have accrued from the gains that you've made from that money in the taxable brokerage account. So in other words, if you put $1,000 into a taxable brokerage account and it grows to $1,200, and then you move that $1,200 into the donor-advised fund, you're not going to have to pay taxes on that $200. You get to make the full $1,200 contribution to the donor-advised fund,

and then the charity that receives that money will get that full $1,200. And it's just a beautiful way of being able to make charitable contributions, while not having to pay the capital gains tax burden that you otherwise would have had to pay if you would withdraw that money. So what I'm saying is if you have a long-term lifetime goals of giving a certain amount of money to charity, if you have those types of philanthropic goals, you could prioritize that in this one-year period. Well, and here's the cool thing about that, Paula, too. She can put the money into just a regular brokerage account. It doesn't even need to make that decision today. but that's definitely on the table for later, and it's another great reason to have flexible money.

Absolutely. I think sometimes we get over-obsessed about making sure that all of our money is taxed advantaged. If you want to avoid paying a bunch of experts later on ways to untangle all of these messes you've made, flexibility is a thing that might not look very sexy now, but certainly comes in really handy later. So thank you, Flo, for asking that question and congratulations on your new job.

We'll return to the show in just a moment. Our next question comes from Mary. Hi, Paula. My name is Mary, and I am from California. I'm an avid follower of your podcast, and I also follow you on Instagram. I love your articulate, well-thought-out answers to many of the questions submitted to you. Anything about financial and real estate investment. as well. Thank you for what you do. My question to you is related to restricted stock units as grant options through an employer. I started working for a high-tech company that's growing fast here in Silicon

Valley in California. I started work for them in April 2019. Part of my job offer then was a grant of RSUs in the amount of $80,000. This was equivalent. to 315 units of the restricted stocks. At the time, the share price of the company was at about $254 per share. They are to vest over a two-year period, starting on my one-year anniversary. I got the first batch of RSUs vested and distributed to my Fidelity account this month. The vesting of the rest of the stocks will continue on a quarterly basis hereon until the end of two years. Today, the stock price is about $365 per share compared to $254 per share last April 2019 when I started with a company. So that's amazing. It is about a 44% increase in the stock price.

My question to you is, what would you recommend, given the volatility of the market now, should I sell the shares, cash out and either hold the asset in cash? pay off some student loan debt, or reinvest the amount to an index mutual fund, reinvest the proceeds, that is. Or should I continue to hold the stocks in my individual brokerage account, given that the company is doing so well with the stock price in the market and are expected to grow more in the next few years? So it seems there is much uncertainty in the market and the overall economy. I would appreciate your thoughts and insights.

If you were in my shoes, what would you do? Hey, thanks, Mary, for that question. And congratulations, by the way, on working for a company the last year where you get RSUs. And for people that don't know, restricted stock units, this is a way that a lot of companies, and specifically I found a lot of tech companies, though it doesn't have to be a tech company, reward employees and also try to get you to stay around and not jump ship, right? They'll give you stock,

but they vest like Mary said over a number of years. In her case, she said over two years. And you have these coming, but they're not yours yet. So that's where restricted comes in. Yes, they look pretty, but you can't touch them until X amount of time. And so if you stick with us for a while, I've got all this stock. that you'll be able to get. And in Mary's case, that stock now that's in her account is also done very well, which is cool.

So to that degree, when we think about restricted stock, it is what it is. You don't control the flow of this money. It frankly then just comes down to your goals of what you do with it once it shows up. The best answer to your question then is around your goals. while we know a lot about your employment, I don't know anything about when you would ultimately want to spend this money. What is it going to be a fuel to achieve in the future? Because that's how you determine where to put it later on.

Also, when it comes to your company, a lot of people get too wrapped up in the future of the company and where the company's headed. The cool thing about where the company's headed is if you continue to work there, you will get money from that company in the form of a paycheck. Hopefully, if you're great with that company and they do well, it'll be an increasing paycheck, which means more dependence on your income stream from that company and bigger financial rewards. But because of that, we also don't want your portfolio because your income comes from that

company is going to be dependent on that employer. We don't want your portfolio to also be 100% dependent on whether that, company does well or not. So experts will always tell you to limit at the most, if you're going to be prudent, 10% or less, and usually a lot less of your net worth to that employer's stock. And a lot of people will even say 5% of that money. Now, that's just a rule of thumb. If you told me that you wanted to buy a house in the next couple years, and you're going to need every dollar to do that, and we don't care about long-term goals beyond that, well, then let's get rid of all of it, because being in a volatile high-tech position where you've already made a lot of money,

let's lock it in and make sure that you get the house of your dreams. But if that's not the case, and it's long-term, and you don't mind the volatility of your company, maybe it is closer to keeping 10% of your money there. So just directionally, that's the way I think about it. What is the time frame until you need the money? How do we make sure that we don't load up on a single stock, especially the stock where you work, where your income's already dependent on that stream of income?

Joe, you said 10% of your net worth. Do you mean 10% of your investable assets? Nice, nice job there. Yeah, yeah. I only ask because I have a real estate brain. Yes, absolutely. And what that means, by the way, too, is that things like your home that you live in and you love, don't count that. Don't count things like that or your furniture or those cool high-priced threads that you wear, Mary. None of that counts. Or the equity that you hold in your rental properties. Yes. Or the value of that mullet you're developing like I am. Yeah. Do you think that has some street value? Well, it is street cred. I don't know about.

street value. It has Goodwill. Yes, in some circles. Yeah, I agree. The big red flag for me here, Mary, when I hear your question, when I hear your situation, the single most important consideration that comes to mind is the amount of your portfolio that is held in one single individual company stock. Regardless of what company that is, it is risky to have too large of a portion of your portfolio held in individual stocks generally and particularly in the one individual stock in particular. The framework that I would use in determining what you want to do with this stock would start from, hey, what percentage of my overall investable portfolio does this represent and how can I get this down to a reasonable level? And Joe, I'm with you. I think 10%

sounds way too high. I would have it be less than 5%. So, Mary, if you wanted to keep some of that money invested in your company stock, but then use another portion of it for diversification, either by investing it in an index fund or using it to pay off student loans, I think that's a great strategy, regardless of what happens in the future, there's a difference between the result or outcome versus the soundness of the decision-making strategy itself. So let's say that you sell off some of your company stock and move that money into an index fund, and then your company ends up going bonkers crazy and doing super, super well. You could have ultimately had a better result had you held that money in company stock. If that is the case, if that's how the future ends up

playing out, does that mean that moving a portion of your company stock into index funds was a bad idea? I would argue no. I would argue that it is still a good idea, even if in a given hypothetical future scenario, it didn't have the best possible outcome because it is fundamentally a good idea to diversify and make sure that you have a well-balanced portfolio and make sure that you do not have an over-concentration of your portfolio in any one company stock. And again, I don't know what percentage of your overall portfolio the stock units represent. So that's really where this answer for you has to start from. Here's something else I like that people think, which is when I first tell people to go to 5% of their portfolio, they'll go, but that's such a low number.

Well, it might be today, but the cool thing about this strategy, Paula, is as your net worth increases, if you like your company, the more stock you'll be able to hell in just sheer dollar value. So as your net worth grows, you know, where maybe today you're holding $5,000 of that stock, maybe later on it's going to be $50,000. And if you think about that's 5% of your money overall, that's a great thing. So it doesn't mean that you can't grow the pie of that one asset, but that you're not going to wreck your strategy by having too much money in that single company. You know, I manually track my net worth twice a year on a spreadsheet. It takes hours. I log into every single account and manually transcribe the balance of that account into a spreadsheet. I do that twice a year.

I intentionally make it manual so that it's sort of a moving meditation. I can reflect on every account as I'm doing it. One of the things that I do as part of that process is I will calculate the sum of all of my investments. So we're not talking about total net worth. You know, we're not talking about rental property equity. I'll calculate the sum of all of my market investments that are held in brokerage accounts. And then I will look at the balance that's in my Robin Hood account, which is the account that I use to hold individual stocks. And I calculate the percentage of what percentage of my overall market investments is held in individual stocks.

And so by tracking that number, by knowing that, and of course it's a changing number, partially depending on how the overall economy is doing, that number can fluctuate wildly because stocks can fluctuate wildly. But by monitoring and tracking that number, I can make sure that the percentage doesn't grow to be unwieldy. I love that. I love the fact that because you're doing it manually, it gives you time to think, right? I mean, I can hear some people saying to their device, Paulinexon is very inefficient sitting there with an Excel spreadsheet or with a pen and paper when you have so many efficient ways. It can be tracked automatically, you know, through an app or spreadsheet or a proclamation. but it's that inefficiency that gives you the time to contemplate where your opportunities might be. And that's an important thing. I think we forget in this age of faster equals better. Exactly, exactly. And I have no objection to using any of those automated tools on a daily or weekly or even a monthly basis.

But I think that twice a year, you know, once in the summer and once in the winter, put aside an evening to sit down and go through everything manually and slid. I think there's a lot of value in that. Not as an instead of, but rather as an in addition to. Yeah. So thank you, Mary, for asking that question. Our final question today comes from another anonymous caller. And Joe, you and I name all of our anonymous callers. So what name should we give this one? Well, here's the deal.

When you and I started this, it was because I was telling you a story about how we made up a name when we put our name in at a bakery. And I decided that I was going to be Harrison Ford. And it was really cool. And I totally forgot that, by the way. And is the guy is bringing around my tuna salad sandwich and he's going, order for Harrison. Harrison? I forgot I was doing it. But so Cheryl and I always had this rule that you and I have adopted that if we don't have a name, it's the person who's on the last movie or TV show that we saw.

So I'm watching a great series right now called Broad Church. fantastic series on Netflix now. I highly recommended. Olivia Coleman's the lead. So let's call her Olivia. Perfect. Well, in that case, our final question for today comes from Olivia. Hi, Paula. Love the show and the in-depth insights you've provided on various financial topics. Hoping you can help clarify some details or nuances around a critical item of the early retiree strategy, the Roth conversion ladder. In looking into this more, I came across the pro-rader rule, but I'm unclear on if that's applicable to the Roth conversion ladder strategy.

It seems like it's been mostly discussed in terms of a backdoor Roth conversion, but I'm hoping you have some insight into if this is something to watch out for or keep in mind when doing a Roth conversion ladder as well, a.k.a. Should someone consider this Roth conversion ladder strategy, also do some basic preparations such as consolidating all their planned conversion funds into a 401k or 403B from a rollover traditional IRA account before starting this process? Or is that irrelevant, but one should keep a certain sequence of conversions in mind, such as converting assets from a roll over traditional IRA to a Roth IRA, first, before rolling over all the funds from a 401k

into a traditional IRA before the conversion process? Or is this all just over-complicating a simple strategy. Appreciate any thoughts or inputs you have. Thanks again for all you do and keep up the great work. Olivia, that's a fantastic question. Now, first, for the sake of everybody who's listening, let me set up some background so that the people who are listening understand the context of this question. If you plan on retiring early and you want to be able to take money out of your retirement accounts so that you can live on that money during your early retirement, one popular strategy is what's called the Roth conversion ladder. This is how it works. While you're working, you contribute money to pre-tax retirement accounts, such as your 401k, your 403B, maybe your

workplace offers a simple IRA. So you contribute this money into pre-tax retirement accounts during your career. Then at the point that you decide is appropriate, and there's some factors that go into determining when that decision is made, but at the appropriate point, you then transfer your employer's retirement assets into a traditional IRA. And from that point forward, you start converting the assets that are in a traditional IRA into a Roth IRA. Now, you'll pay tax on the conversion, so you want to plan when you make those conversions wisely in order to minimize the tax hit from the Trad IRA to Roth IRA conversion. Now, once that money has been converted from a trad to a Roth IRA, you then have to wait for five years before you're allowed to touch the

converted money. But after five years, you can then withdraw the conversion tax-free and penalty-free. And so this is a process that people use in order to be able to access some of their pre-tax retirement contributions during their early retirement. And of course, it requires quite a bit of planning because, as I said, there's a five-year gap in between when you make this conversion and when you are allowed to withdraw this conversion. Now, to your question, your question is about the pro-radar rule, and that refers to a rule by the IRS that states that when you are converting money from a traditional IRA to a Roth IRA, you cannot necessarily convert the full balance of it. You have to convert a proportionate balance based on your total IRA assets. As you said in your question, this rule typically comes up in conversations when people are asking about.

the specifics of how to make a backdoor Roth conversion, which we talked about at the beginning of this episode when we were answering a question from Marissa. And I'm sure you're not going to like this answer. The unfortunate for you reality is that the prorator rule applies to all traditional IRA funds, including funds that were made as a deductible traditional IRA contribution in a year in which you were eligible to make traditional IRA contributions, and also to funds that were made as 401K contributions that later got rolled over into a traditional IRA. So in other words, the prorator rule is not specific only to funds that get put into a non-deductible traditional IRA for the purpose of then being converted into a backdoor Roth.

It also applies to other IRA funds as well. And so the prorator rule is something that you absolutely need to calculate as you are making this conversion. In the show notes, which will be available at afford anything.com slash episode 260, we will place links to a handful of articles about the pro-rader rule. But as you are executing this conversion, because the pro-rater rule is rather complicated to calculate, and because the calculation is based on the funds in your account at the end of the year, not at the time in conversion, you will absolutely want a tax professional on your side. So get a CPA, talk to that CPA about the pro rater rule, talk to that CPA about the fact that you want to execute this Roth conversion ladder strategy and make sure that you are working closely with a CPA or another licensed tax professional to guide you through this because you need to make sure that the calculation is correct. Yeah, that was going to be, Paula, my only point is that now we're in pretty needy water and you don't want to mess this up. So this is where I would have a professional in your corner to verify that everything that you're doing is correct.

To the second half of her question where she asked, do I need to do any basic preparations? Well, I mean, first of all, the money needs to be in an IRA account. So in order to roll over money from an IRA into a Roth IRA, that money has to be in an IRA account. So if it's currently in a 401k or a 403B, it will need to be rolled into an IRA in order to then be rolled from that IRA into a Roth IRA. So that is a basic level of preparation that needs to happen. In terms of the sequence of conversions, no, that really doesn't matter. The only thing, and this is not preparation, but Paula, the only thing that I think is if you have some investments that are in the right spot and you like where they're at and you have others that are not in the right spot, and you're looking at one IRA to move first versus another one,

I would always start your process with the stuff that needs to be moved anyway. And I see people just kind of go through this haphazardly, but I think that if you've got some assets that clearly are in the wrong place, while you're moving them to the right place, let's also use the right tax strategy at the same time. So what you're saying is if you want to revise your asset allocation or rebalance your portfolio, you may as well make those corrections in tandem with making this conversion.

Yeah, start there. So it feels much more like a logical process instead of just arbitrarily picking this is the money I'm going to start with. Yeah, absolutely. And that goes back to basic asset allocation management. You know, you always want to be checking your current asset allocation, making sure that that looks good,

and, you know, making any adjustments in your portfolio that you need in order to keep that allocation on the right track. weed your garden. Exactly. It's that time of year to pull weeds. I was pulling weeds earlier today. Literally? Literally.

There's something cathartic about that. There's something that just feels good. Yeah. About taking the weeds out of the garden. Yeah. And when I need time to think, that's the first thing that I do. Even though we're selling this house, that's the first thing I do. Oh, nice.

Go pull some weeds. So, Joe, we've done it. Already? We've done it. We've answered the question. for today's episode. Another great batch of questions, weren't they? Absolutely.

And people doing such cool stuff, moving, getting better jobs, cleaning up their asset allocation, deciding to give themselves some flexibility, starting a job with a company that pays you RSUs or a year into it, restricted stock units. How often do we get to talk about restricted stock units and the pro rata rule, a Roth conversion ladder, and we get to talk about what to do with your access money from your new job.

I mean, pretty cool. We are officially nerds. It is fantastic. Is it cool that we like that? I'd say so. It gives us street cred with our kinds of people, right? So, Joe, where can people find you if they would like to hear more of you? Well, you can hear us at the Stacky Benjamin show, which is a little like mixing a

late night talk show with finance. So if you like your finance, a little fun and relaxed, and three days a week, Monday, Wednesday, Friday, come join us there. We just join Westwood One, which is the second biggest, second biggest radio network. We're part of their podcast buildout. You won't hear us on the radio. Although I have heard people say that they've heard advertisements for stacking Benjamins on the radio lately. That's super cool. That part's cool, except the part, well, it is kind of cool to have a guy that sounds like he's hot 955 talking about my show. He sounds like this. And if you like financial discussions that might be a little funny, listen to Stalky Bedgevans.

Odd, Westwood Wad. That's a great, great radio ad voice. It's so bad. I'm like, really? Really, that's us? Really? Okay. Yeah.

But anyway, Monday, Wednesday, Friday, Stacky Benjamin's. And on most Fridays, you will find the one and only Polar pant hanging out with us. That is absolutely true. She currently is holding back on our year-long trivia contest so she can make a brilliant run at the end of the year and win the whole thing. I'm the underdog in that contest. Not last year, but this year, you truly are. Yeah. Well, it's not even the midpoint of the year yet, so I've got time. You've got game. We know. You've got game. Exactly. Awesome. Well, thanks for sending this time with us, Joe. Thanks a ton again, Paula. That's our show for today. If you enjoyed today's episode, please share it with a friend or a family member. That's the single most effective way to spread the message of financial literacy and financial independence. You can send your friends or family a link to this show at Afford Anything.com slash episode 260. That's Affordanything.com slash two six zero. If you would like to subscribe to the show notes so that you get notes and updates and synopsies of our episodes, you can do so at Afford Anything.com slash show notes.

Thank you to the sponsors of today's episode, Gusto, Radius Bank, Beta Brand, and PolicyGenius. For a complete list of all of our sponsors, plus the deals, the discounts, the promo codes that they offer, you can find all of that at Afford Anything.com slash sponsors. Thank you so much for tuning in. My name is Paula Pantt. This is the Afford Anything podcast. Spreading the message of aligning your money, your time, your energy, and your attention with that which you prioritize the most. Thanks for being part of this community, and I will catch you. the next episode.